Income Types and Reporting Flashcards

Which of the following income items is NOT subject to Social Security and Medicare taxes (FICA)?

Answer: Dividend income

Dividend income is investment income and is not subject to FICA taxes; only earned income from employment is subject to FICA.

A taxpayer sells stock for $10,000 that they purchased for $7,000 two years ago. How is the $3,000 gain classified?

Answer: Long-term capital gain

Assets held for more than one year qualify for long-term capital gain treatment, which is taxed at preferential rates (0%, 15%, or 20%).

Which of the following is considered tax-exempt interest that must still be reported on Form 1040?

Answer: Municipal bond interest

Municipal bond interest is exempt from federal income tax but must still be reported on Form 1040 because it affects other calculations like Social Security taxability.

Cancellation of debt income is generally:

Answer: Taxable as ordinary income unless an exclusion applies

Forgiven debt is generally taxable as ordinary income, but exclusions apply for insolvency, bankruptcy, and certain mortgage debt forgiveness.

Which form reports dividend income paid to a shareholder?

Answer: Form 1099-DIV

Form 1099-DIV is issued by corporations and mutual funds to report dividends and capital gain distributions paid to investors.

A self-employed taxpayer earns $50,000 in net profit. What percentage of net self-employment earnings is subject to self-employment tax?

Answer: 92.35%

Self-employment tax is calculated on 92.35% of net earnings (net profit × 0.9235) to account for the employer's share of FICA.